How digital transformation is disrupting IT outsourcing

Brad L. Peterson, partner and co-leader of the business and technology sourcing practice of law firm Mayer Brown, discusses how new digital services are disrupting the IT outsourcing industry and what this means in terms of how outsourcing contracts must evolve.

Digital transformation is the business goal du jour. And while the increased adoption of social, mobile, analytics, Cloud, autonomics, robotics and Internet of Things technologies is creating tremendous opportunities for the enterprise, it’s also introducing new risk.

Most notably, these emerging technologies are impacting on how IT organizations interact with their IT service providers. These newer solutions tend to be less customisable, more scalable, less expensive and more automated than traditional outsourced services. They often require less deal-specific investment and the services may be shared among many customers. Thus, the outsourcing contracts that govern them must evolve in order to continue to create value and mitigate risk for the IT outsourcing customer.

We talked to Brad L. Peterson, partner and co-leader of the business and technology sourcing practice of law firm Mayer Brown, about how new digital services are disrupting the IT outsourcing industry and the way in which businesses investigate, buy, negotiate with, select and manage providers of these technologies.

What goes wrong for customers who use traditional sourcing approaches for digital age services?

Peterson: Traditional sourcing approaches assume that suppliers will customize their services to meet customer needs. Each provider offers its own standard product, often quite unlike competing products. So, the traditional process of asking several suppliers to make proposals to meet customer needs and evaluating those on an apples-to-apples basis fails. You don’t get back proposals that comply, and they are difficult to compare.

Traditional sourcing also focuses on the cost of meeting requirements. Digital age services often cost more but provide new benefits such as new big data insights, connections to mobile customers and flexibility on volumes.

Yesterday’s contract will not meet your needs for digital age services. You can’t rely on traditional assurances on good and workmanlike performance by qualified people when the services are performed primarily by machines.

What sorts of new issues and risks do these digital age services present to IT outsourcing customers?

Peterson: The customer tends to bear the risk of gaps between what the customer needs and what the product does.

Little has been done to integrate digital age products with corporate ecosystems. Someday—perhaps—middleware will catch up. But today that means new needs for the customer to integrate disparate systems or to hire an integrator to do so. Digital age providers often make little commitment to provide reliable services for long periods of time. Many are new companies or experiments by established companies. Thus, customers are at risk of business disruption as the digital age providers change their business models or simply fail to deliver.

Are there new sources of critical legal risk?

Peterson: Cybersecurity and data privacy are critical concerns. Many digital age products are weak in those areas, and many digital age providers make few promises that their systems are secure. The Internet of Things is full of insecure end-point devices. Your cybersecurity is only as strong as its weakest link, and its weakest link quite likely is a digital age supplier.

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